Leases and underleases - Insurance provisions

Learning Outcomes

This article examines the typical insurance covenants in commercial leases and underleases, addressing who insures and pays, the scope of insured risks, and allocation of risk for damage or destruction; explains rent suspension (cesser), reinstatement obligations, and termination rights within insurance provisions; discusses dual insurance and subrogation, including composite insured and waiver of subrogation arrangements, with strategies to avoid contribution disputes; and outlines how to structure consistent insurance provisions in underleases and practical remedies where covenants are breached or insurance is unavailable.

SQE1 Syllabus

For SQE1, you are required to understand insurance provisions in commercial leases and underleases, including risk allocation, rent suspension (cesser), dual insurance and subrogation, with a focus on the following syllabus points:

• The allocation of risk for damage or destruction of premises between landlord and tenant
• The structure and effect of insurance covenants in leases and underleases
• The legal and practical implications of dual insurance and contribution
• Rent suspension (cesser) clauses and their operation following insured damage
• The effect of insurance provisions on liability and subrogation, including waivers
• Advising clients on insurance obligations and remedies for non-compliance
• Interaction between repairing covenants and insurance provisions, including uninsured risks
• Consistency of insurance obligations in underleases with headlease covenants

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. In a commercial lease, who is usually responsible for insuring the building, and how are the costs typically recovered?
2. What is the effect of a rent suspension (cesser) clause following insured damage to the premises?
3. Explain what is meant by dual insurance in the context of leases and why it can cause problems.
4. If a tenant causes damage by negligence, but the landlord's insurance covers the loss, can the insurer recover its outlay from the tenant?

Introduction

Insurance provisions are a fundamental part of most leases and underleases. They determine who bears the financial risk of damage or destruction to the premises, how insurance is arranged and paid for, and what happens to rent and obligations if the property is rendered unusable. For SQE1, it is essential to identify the key insurance terms, understand risk allocation and the operation of rent cesser, and apply these principles to practical lease scenarios. Particular focus should be placed on how insurance dovetails with repairing obligations, what happens when a risk is uninsured, and how to avoid dual insurance and subrogation pitfalls.

Insurance and Risk Allocation in Leases

A lease will always specify how the risk of damage or destruction to the property is allocated between landlord and tenant. The default position at common law is that the tenant bears the risk from the date of the lease, but this is almost always modified by express terms. In practice, even if risk is allocated to one party, the covenants will prescribe who must insure and for what, and who funds the premium.

Key Term: risk allocation
The contractual arrangement in a lease that determines which party bears the financial consequences of damage or destruction to the premises.

In most commercial leases, the landlord arranges insurance for the building and recovers the cost from the tenant as an insurance rent. The tenant is usually responsible for insuring their own contents and business risks (for example, stock, IT equipment, business interruption other than the landlord’s loss of rent cover), and for maintaining appropriate public and employer’s liability cover. Where a tenant leases a whole building, the parties may agree that the tenant insures; where the letting is of part in a multi-let building, the landlord will almost always insure the entire building, recovering the costs via insurance rent or service charge.

Key Term: insurance rent
The sum payable by the tenant to reimburse the landlord for the cost of insuring the building against specified risks, typically including the building premium, loss of rent insurance, insurance premium tax, any excesses, and the cost of periodic insurance valuations.

Typical Insurance Provisions

A well-drafted lease will include:

• An obligation on the landlord to insure the building for the full reinstatement value against specified insured risks (such as fire, flood, storm, explosion, lightning, and sometimes terrorism), subject to market availability and insurer-imposed exclusions, excesses, limitations and conditions
• An obligation on the tenant to pay the insurance rent (defined to include buildings premium, loss of rent cover, IPT, excesses, and valuation costs)
• Tenant covenants not to do anything which could vitiate the policy and to comply with insurer requirements, including any reasonable stipulations as to use, storage of hazardous materials, and notification of works
• A covenant by the landlord to use insurance proceeds to reinstate the premises and to pursue claims diligently; the tenant may seek an obligation on the landlord to make up any shortfall from its own funds
• A rent suspension (cesser) clause if the premises are unfit for occupation due to insured damage, often tied to the period of the landlord’s loss of rent insurance
• Rights for either party to terminate if reinstatement is impossible or not completed within an agreed longstop period

Key Term: insured risks
The specific risks (e.g., fire, flood, storm, explosion, lightning) against which the landlord is required to insure the premises under the lease, often with a catch-all for other risks reasonably required and available on reasonable terms.

Key Term: uninsured risks
Risks that the landlord does covenant to insure against under the lease; damage caused by an uninsured risk will usually fall within the tenant’s repairing obligations unless the lease provides otherwise.

Key Term: loss of rent insurance
Insurance obtained by the landlord to cover the landlord’s loss of rent during the period the premises are unusable due to insured damage; commonly for one to three years.

Key Term: vitiation
The insurer’s refusal to pay or reduction of cover due to a breach of the policy’s terms or conditions, for example, arising from the tenant’s acts or omissions.

It is standard drafting to qualify the landlord’s insurance obligation so that it is subject to insurers’ exclusions, excesses and conditions and the availability of cover on reasonable market terms. This ensures the landlord is not in breach if a risk becomes uninsurable or prohibitively expensive. The corollary is that tenants must understand which risks are uninsured and therefore fall to them.

Worked Example 1.1

A lease requires the landlord to insure the building against fire and the tenant to pay the insurance rent. The premises are destroyed by fire. Who is responsible for reinstating the building, and does the tenant have to continue paying rent?

Answer:
The landlord must use the insurance proceeds to reinstate the building. If the lease contains a rent suspension clause, the tenant's obligation to pay rent will be suspended until the premises are reinstated and fit for occupation. The landlord’s loss of rent insurance typically funds the rent cesser period, and the tenant should not pay rent during the suspension unless the policy is vitiated by the tenant’s acts.

Rent Suspension (Cesser) Clauses

A rent suspension (cesser) clause is a standard feature in commercial leases. It provides that if the premises are rendered unfit for occupation or use due to damage by an insured risk, the tenant's obligation to pay rent (and sometimes other sums) is suspended until the premises are reinstated or for a specified period.

Key Term: rent suspension (cesser) clause
A lease provision that suspends the tenant's obligation to pay rent when the premises are unfit for occupation due to insured damage, either in full or a fair proportion where only part is affected.

Key points in rent cesser drafting include:

• Clear trigger: premises unfit for occupation or use by reason of damage caused by an insured risk; in multi-let buildings, the clause often extends to damage to the building that renders access or essential services unusable
• Scope: suspension of the annual rent in full or a fair proportion if only part is affected; tenants often seek suspension of other sums reserved as rent (such as insurance rent and service charge) to avoid ongoing payments while incapable of occupation
• Duration: ideally until reinstatement, but commonly limited to the period covered by the landlord’s loss of rent insurance
• Conditions: cesser will not apply to the extent the policy is vitiated due to the tenant’s acts or omissions or those of persons at the premises with the tenant’s authority
• Longstop: a tenant’s right to terminate if reinstatement has not occurred by the end of the cesser period or a specified longstop date; landlords may also reserve rights to terminate if reinstatement is impossible or impractical

A robust rent cesser clause protects tenants from paying for premises they cannot occupy, while the landlord’s loss of rent policy preserves the rent stream. If the lease is silent, rent continues to be payable even if the premises are unusable.

Worked Example 1.2

A flood damages a leased shop, making it unusable for six months. The lease contains a rent suspension clause. What is the effect?

Answer:
The tenant does not have to pay rent during the period the shop is unfit for occupation due to the insured flood damage, up to any maximum period specified in the lease. If other sums (such as insurance rent and service charge) are reserved as rent, ensure the clause suspends those sums too, or the tenant may remain liable for them despite not being able to trade.

Dual Insurance and Subrogation

Dual insurance arises when both landlord and tenant have separate insurance policies covering the same risk for the same property. This can lead to disputes over which insurer pays and whether one insurer can recover from the other party.

Key Term: dual insurance
The situation where two or more insurance policies cover the same risk and property, potentially leading to issues of contribution and subrogation.

Key Term: subrogation
The right of an insurer who has paid out on a claim to step into the shoes of the insured and pursue recovery from a third party responsible for the loss.

Key Term: contribution
The principle that where two or more policies cover the same insured risk and loss, the insurers share the liability between them, typically pro rata to the extent of cover.

If the landlord's insurer pays for damage caused by the tenant's negligence, the insurer may seek to recover its outlay from the tenant by subrogation. However, if the lease requires the tenant to contribute to the insurance premium, the courts may find that the insurance is for the benefit of both parties, preventing subrogation against the tenant. The leading authority remains Mark Rowlands Ltd v Berni Inns Ltd [1986], where the tenant’s contribution to the premium and the lease structure led the court to conclude that insurance was intended to cover losses caused by the tenant’s negligence, barring subrogated claims.

Leases manage subrogation risk by:

• Naming both landlord and tenant as composite insureds, so each has direct rights under the policy and the insurer agrees not to pursue one insured for the benefit of the other
• Including an express insurer’s waiver of subrogation against the tenant, often required by tenants to avoid claims where they have funded the premium
• Noting the tenant as an interested party at minimum, and carefully structuring the insurance rent so the tenant’s contribution supports a Rowlands-type outcome

Key Term: waiver of subrogation
A contractual agreement that prevents an insurer from pursuing recovery from another party to the contract (e.g., the tenant).

Key Term: composite insured
A policy arrangement where both landlord and tenant are named as insured parties, so each can claim directly under the policy and the insurer treats them as separate insureds under one policy.

Worked Example 1.3

A tenant negligently causes a fire that damages the premises. The landlord's insurer pays for the repairs and seeks to recover the cost from the tenant. The lease requires the tenant to pay the insurance rent. Can the insurer recover from the tenant?

Answer:
Following the principle in Mark Rowlands Ltd v Berni Inns Ltd [1986], if the tenant pays towards the insurance and the lease is structured so that the insurance is for the benefit of both landlord and tenant, the insurer cannot recover from the tenant by subrogation. An express waiver of subrogation or composite insured wording in the policy would support this position.

Practical Issues with Dual Insurance

Dual insurance can cause problems such as:

• Disputes between insurers over who pays and in what proportion (contribution)
• The risk of insurers seeking to recover from the other party (subrogation), unless the lease includes a waiver of subrogation or composite insured wording
• Increased costs due to overlapping cover and the possibility that insurers reduce payouts due to other insurance

To avoid these issues, leases often require only one party (usually the landlord) to insure the building and may include a waiver of subrogation clause. Tenant-specific policies (e.g., contents or business interruption) should be limited so they do not overlap with the landlord’s buildings policy. Where the tenant insures the building (more common on lettings of whole), the lease should avoid the landlord insuring the same risk and ensure coherent rights to claim proceeds and standards for reinstatement.

Key Term: waiver of subrogation
A contractual agreement that prevents an insurer from pursuing recovery from another party to the contract (e.g., the tenant).

Key Term: composite insured
A policy arrangement where both landlord and tenant are named as insured parties, so each can claim directly under the policy.

Drafting tips to mitigate dual insurance risks include:

• Expressly prohibiting the non-insuring party from taking out overlapping building cover
• Requiring the landlord to procure that the tenant is named as a composite insured or at least as an interested party and that the insurer waives subrogation against the tenant
• Clarifying that the landlord’s obligation to insure is subject to reasonable market availability and insurer conditions; if cover becomes unavailable, the landlord must notify the tenant and cooperate to agree alternative arrangements
• Ensuring the policy covers full reinstatement value, including demolition, site clearance, professional fees, and VAT, with periodic valuations to avoid under-insurance

Worked Example 1.4

A tenant grants an underlease of part of the premises. The headlease requires the tenant to insure the whole building. What should the underlease provide?

Answer:
The underlease should require the undertenant to pay a fair proportion of the insurance rent and to comply with the insurance covenants in the headlease. The underlease should not require the undertenant to insure the building separately, to avoid dual insurance. The undertenant should covenant not to do anything to vitiate the policy and to provide information the tenant needs for insurer compliance.

Insurance Provisions in Underleases

The insurance provisions in an underlease must be consistent with those in the headlease. Incoherence can produce coverage gaps or dual insurance problems and may put the headtenant in breach. The undertenant will usually be required to comply with the insurance covenants in the headlease and to pay a proportionate share of the insurance rent. Where the headlease makes the headtenant the insuring party for the building, the underlease should not require the undertenant to insure the building; conversely, where the landlord insures, both headlease and underlease should align in obliging each tenant to fund the insurance rent and comply with insurer conditions.

The licence to underlet commonly requires a direct covenant by the undertenant to the superior landlord to observe insurance covenants in both the underlease and the headlease (as they apply to the underlet property). This provides the superior landlord with a direct remedy if the undertenant endangers insurance, for example, by breaching use restrictions or failing to comply with insurer requirements.

Tenants and undertenants should also consider whether terrorism cover is required (often through Pool Re in the UK). In some locations or sectors, this cover may be expensive; the lease should balance cost and risk by framing the insuring obligation as “reasonably available on reasonable terms,” and clarifying who bears the cost.

Worked Example 1.5

A headlease of a multi-let office block requires the landlord to insure the building against fire, flood, storm and “such other risks as the landlord shall reasonably require,” subject to market availability. The underlease of one floor requires the undertenant to pay “a fair proportion of the insurance rent.” Subsidence damages the building. Is the undertenant liable to fund repairs?

Answer:
If the landlord has insured subsidence as a reasonable additional risk and the policy responds, the landlord should use proceeds to reinstate; rent should be suspended in accordance with the cesser clause. If subsidence is not an insured risk under the landlord’s policy, damage will likely be an uninsured risk and fall under tenants’ repairing obligations (as framed in the headlease and underlease), unless the leases provide otherwise. Undertenant liability depends on the repairing covenant and whether subsidence is carved out as insured damage in that covenant.

Interaction with Repairing Covenants

Insurance provisions must be read together with the tenant’s repairing obligations. A common tenant protection is to exclude liability to repair disrepair caused by insured risks, unless the insurance is vitiated due to the tenant’s acts or omissions or the insurer refuses payment for reasons attributable to the tenant. This ensures insured damage is dealt with via the landlord’s insurance and reinstatement covenant, rather than falling back on the tenant’s FRI obligations.

Include the following in a tenant-focused repairing covenant:

• No obligation to put or keep the premises in any better state than evidenced by a schedule of condition (for older premises)
• Exclusion of damage caused by insured risks unless the policy is vitiated by the tenant’s acts or omissions, or the insurance is limited/unavailable due to tenant-related reasons
• Recognition that the landlord’s obligation to insure is subject to market availability and insurer conditions; if a risk is uninsured, the tenant may bear responsibility unless the lease allocates differently

With newer properties, tenants often seek to exclude liability for design and construction defects while the landlord’s professional team warranties or latent defects insurance are live. Regardless, insured damage should be carved out of repairing obligations to avoid duplication of liability and ensure the insurance responds.

Worked Example 1.6

A tenant under a full repairing and insuring (FRI) lease faces extensive water damage from a burst pipe. The repairing covenant excludes damage caused by insured risks unless the insurance is vitiated by the tenant. The landlord’s policy responds and pays out. Who does the work, and who pays?

Answer:
The landlord should apply the insurance proceeds to reinstate the premises (including obtaining consents). The tenant’s repairing obligations do not apply to insured damage, and rent should be suspended under the cesser clause while the premises are unfit for occupation. If the lease requires the tenant to pay the insurer’s excess as part of the insurance rent, the tenant will fund that amount.

Practical Drafting Points and Common Pitfalls

• Full reinstatement value: insurance should cover demolition, site clearance, professional fees and VAT to ensure sufficient funds on total loss. Periodic insurance valuations mitigate under-insurance risks.
• Exclusions and market terms: the landlord’s insuring obligation should be subject to reasonable market availability and insurer-imposed exclusions/conditions; mirror this limitation in the tenant’s repairing carve-out to avoid gaps.
• Shortfall in proceeds: tenants often negotiate for the landlord to fund any insurance shortfall from its own resources; otherwise, the tenant may be exposed to return-to-rent before reinstatement is complete.
• Rent cesser scope: ensure cesser covers “all sums reserved as rent,” not just base rent, or the tenant may remain liable for insurance rent/service charge during the outage.
• Vitiation safeguards: include tenant covenants not to vitiate the policy; where vitiation is caused by the tenant, cesser is disapplied and the tenant may bear the loss.
• Termination rights: include mutual termination rights if reinstatement is impossible or not achieved by the end of the loss of rent period or an agreed longstop date; provide that insurance monies (except for loss of rent) belong to the landlord unless otherwise negotiated.
• Avoid dual insurance: require a single insuring party for the building and include composite insured or waiver of subrogation language to protect tenants who fund premiums.
• Terrorism cover: consider whether Pool Re or equivalent is reasonably required; frame the obligation by reference to market availability and reasonable terms.
• Underleases: ensure undertenant obligations mirror headlease insurance covenants and avoid separate building insurance by the undertenant; require direct covenants in licences to underlet.

Exam Warning

In SQE1, you may be asked to identify the consequences of failing to include a rent suspension clause or to explain the effect of dual insurance. Always check who is required to insure, who pays the premium, and whether the lease includes a waiver of subrogation. Read the repairing and insurance clauses together: if insured damage is not excluded from the tenant’s repairing covenant, the tenant could be liable for reinstatement despite paying the insurance rent. Consider whether other sums reserved as rent (insurance rent and service charge) are suspended, and whether termination rights exist if reinstatement is delayed.

Revision Tip

When reviewing a lease for insurance provisions, always check:

• Who arranges the insurance and for what risks (including any “reasonably required” risks)
• Who pays the premium (insurance rent) and whether it includes loss of rent insurance, excesses and valuation costs
• Whether the lease includes a rent suspension clause and the duration of cesser
• Whether there is a waiver of subrogation or composite insured clause
• How the insurance and repairing covenants interact (insured damage carve-out)
• The undertenant’s obligations in any underlease and consistency with the headlease

Key Point Checklist

This article has covered the following key knowledge points:

• Insurance provisions in leases allocate risk for damage or destruction between landlord and tenant.
• The landlord usually insures the building and recovers the cost from the tenant as insurance rent; where the tenant insures, avoid overlap.
• Insured risks should be comprehensive and cover full reinstatement value, subject to market availability and insurer limitations.
• Rent suspension (cesser) clauses protect the tenant from paying rent when the premises are unfit for occupation due to insured damage; consider suspension of other sums reserved as rent.
• Dual insurance can cause contribution and subrogation disputes; leases should avoid unnecessary overlap and use waivers or composite insured wording.
• Subrogation against a tenant who funds the premium is generally barred where the insurance is intended to benefit both landlord and tenant (Mark Rowlands v Berni Inns).
• Repairing covenants should exclude damage caused by insured risks unless the policy is vitiated by the tenant.
• Termination rights should address the impossibility of reinstatement or delays beyond the loss of rent period.
• Underleases must align with headlease insurance covenants to avoid conflicting obligations and coverage gaps.

Key Terms and Concepts

• risk allocation
• insurance rent
• insured risks
• uninsured risks
• loss of rent insurance
• vitiation
• rent suspension (cesser) clause
• dual insurance
• subrogation
• contribution
• waiver of subrogation
• composite insured

Worked Example 1.7

A lease states that rent is suspended during insured damage but is silent on insurance rent and service charge. The landlord’s loss of rent insurance is for two years. After a fire, the premises are unusable for 18 months. Must the tenant pay insurance rent and service charge during that period?

Answer:
Unless the cesser clause suspends “all sums reserved as rent,” the tenant may remain liable for insurance rent and service charge during the outage. Tenant-friendly drafting suspends base rent and other rent-reserved sums for the duration of the landlord’s loss of rent cover; otherwise, the tenant pays these charges despite being unable to occupy.

Worked Example 1.8

A tenant stores flammable solvents contrary to insurer conditions, and a fire ensues. The insurer refuses to pay due to vitiation. The lease excludes insured damage from the tenant’s repairing obligations, except where vitiated due to tenant acts. What is the outcome?

Answer:
The tenant’s conduct has vitiated the policy. The exclusion from the repairing covenant does not apply, so the tenant must bear the cost of repair. Rent cesser will ordinarily be disapplied where vitiation is caused by the tenant; the tenant may have to continue paying rent during reinstatement or fund the works directly under the repairing obligations.